Time Warner's CEO Presents at Bank of America Merrill Lynch Media, Communications & Entertainment Conference (Transcript)

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Time Warner Inc. (TWX) Bank of America Merrill Lynch Media, Communications & Entertainment Conference September 12, 2013 5:20 PM ET

Executives

Kevin Tsujihara - Chief Executive Officer

Analysts

Jessica Reif - Bank of America Merrill Lynch

Jessica Reif - Bank of America Merrill Lynch

So it’s a pleasure to welcome Kevin Tsujihara who is now head of Warner Brothers. Great. So we’re really excited to have you in a new role. Hopefully it’s your first conference, that’s my view. We’re really excited to have you as the new CEO of Warner Bros. Congratulations on your new role, I am seeing you this time. Thank you.

Warner has consistently been one of the strongest and the most profitable studios and you have been a part of that success for decades. In March, obviously you were named CEO. As CEO, what will be different – how does the priority – what are the key priorities now in the key growth side of the business as you see them?

Kevin Tsujihara

Well, I think that, if you look at the studio like you said, we are the most profitable studio out of anyone. We have been number one or number two in the box for, I don’t know, how many years, 22 of the last 27 years most broadcasted shows on air, number one share in home entertainment. So when you look at that, you say okay, well, we don’t need to have to make dramatic shifts. There are changes that’s really about continuing the excellence but when you look at what are the priorities and where can we grow off of that? And you look at the secular trends of television and they are fantastic. The actual business has stabilized. We like the economics and our slate coming up is fantastic and the announcement that we made today around --

Jessica Reif - Bank of America Merrill Lynch

J.K. Rowling?

Kevin Tsujihara

Yes, the J Rowling kind of movies is really exciting. Home entertainment, the transition is taking hold. You’re now seeing a 50% year on year growth on EFT. And so – and the other places where we think we can have growth is DC Comics, or DC entertainment is really going to drive significant opportunities in both consumer products and games. And so you combine that all with, all we are looking at margins and how we can kind of drive efficiencies and I think there really is some real growth opportunities for us.

Jessica Reif - Bank of America Merrill Lynch

Beyond you just taking over CEO of the business, and usual amount of turnover in TV and theatrical division this year, are you worried all of the impact that will have on your business?

Kevin Tsujihara

Well, I think there has just been a lot of turnover for Warner Bros. If you look at, we just haven’t had a lot of turnover over the last 30 years. But I have a tremendous amount of respect for both Bruce Willis and (inaudible). Fortunately they have built incredibly strong teams with a real deep bench below them. I think if you look at from a television production stand, Peter Roth and [Craig Collins] are the best for the business. And on the feature side, with Toby Emmerich running new line, Greg Silverman at Warren Pictures, and Sue Kroll on the marketing side as they fit, we have incredible executives and truly a great opportunity for them.

Jessica Reif - Bank of America Merrill Lynch

So before we go into the divisions, I have just kind of bigger picture – two more bigger picture questions. The international markets have become an increasingly important source of finance [at the edge of focus on products], can you just update us on what you are seeing in some of the key emerging markets and what are the most important markets, is it China, or Latin America, what’s the most region to you, is it newer regions?

Kevin Tsujihara

On the theatrical side, if you look at something like China is kind of incredible story. Five years ago there was – they were basically the 15 th largest theatrical market. Today they are the number one. You can have a film like Pacific Rim which this summer did $108 million in China was more than what they did in the US, did $100 million in US. Last year it happened with Life of Pi and Titanic 3, the re-issue of Titanic in 3D. So it’s become a very important theatrical kind of market. What it hasn’t translated into is a real market with a real ancillary business behind it. We don’t have a big home entertainment business. We don’t have a huge television business in China. So one of the things that – when we see a market like that where you have tremendous appetite for our products, and we see that in the box office. We recently announced the joint venture with Tencent to create a streaming Xbox service called Hollywood VIP in China. It’s a subscription service via the leading ISP in China. They have a number of subscribers already that we are trying to tap into and that business has our product – Universal’s product, Disney’s product and local product and you look at that as an opportunity to build an ancillary business that could have meaningful kind of potential when you look at the size of that theatrical business, so you know the appetite is there. We just have to kind of create the right consumer offering that kind of matches up to that.

Even when you look at that, that market is 50% to 60% local. So we obviously see that as a huge opportunity to create local content in China as well. So with both Hollywood product, local content, try to and build an ancillary business through – basically it’s Netflix, Xbox type service there to really drive that market, because it has huge growth and growth potential. And you have other markets like Russia, Russia was number 10 five years ago, now they are number five and growing and again I think that we can do a number of things to enhance that ancillary business. Latin America, same kinds of dynamics, not quite the same growth level but big opportunities in countries like Brazil to potentially create local content. So we look at local content markets where there is big theatrical businesses that have big local presence is a growing local content. And so an example is like Japan. Japan is really going local and so we’re really kind of stepping up because it’s a good theatrical business and helps us in the ancillary as well.

Jessica Reif - Bank of America Merrill Lynch

When you go local, do you generally go in all-in by yourself, or do you take a local partner?

Kevin Tsujihara

It depends on the market. In some places we go, we can – in the infrastructure is there that would allow us to be able to fund it 100% and maybe potentially pre-sell certain pieces. In China, we would probably go in with a local partner.

Jessica Reif - Bank of America Merrill Lynch

And for China, is that only for theatrical or would it include television?

Kevin Tsujihara

It would include television and like I said, it would probably go into the surface. We want to build – Tencent is a great partner. They really have the kind of relationship with the consumer that we want to kind of build on with this kind of service.

Jessica Reif - Bank of America Merrill Lynch

(inaudible) ISP in the market?

Kevin Tsujihara

They are huge and we have been able to kind of use that to build a big subscription game. So we think that it’s not that much of a leap to go from subscription games to subscription movies.

Jessica Reif - Bank of America Merrill Lynch

And then I have done the cost side of your business, [as the trends] you kind of move into rein in cost, since the great recession the last five years or so, it seems like deals are different, costs have really moderated in terms of how they are growing, does it – how should we think about your margins going forward?

Kevin Tsujihara

I think margins – there is a couple other metrics that we are kind of focused on which is return on invested capital and actual share of operating income, adjusted operating income. There is a lot of accounting distortions on when you get to on margins, that you may have purchase price amortization with step-up of things. You may have different treatments on your company transactions and [as soon as they like] that, they create kind of – not sure apples to apples comparison of each of the studio but with that being said, I think you are right, we have done a good job on the production side. I think we have done a good job of matching and aligning incentives with talent in a way that they are more aligned with us. I think that there are always going to be opportunities to improve on the margin side, I think on the marketing side, we are going to definitely have to kind of figure out a way to create a real direct to consumer relationship. We’ve never had the ability to really know who our customers are and with the digital transitions that are occurring it really is a new opportunity, so we are not re-marketing every film 20 times a year, and so we definitely think we are always looking for efficiencies and we are always going to look to try and improve the margins going forward.

Jessica Reif - Bank of America Merrill Lynch

I guess, let’s start with TV. When people talk about Warner Bros. they often overlook how important television is to you. Can you talk about the economics of your TV business and how it’s positioned today?

Kevin Tsujihara

Yes, television business is great. About half of our profits, it’s one of the highest return on investment capital businesses that we have in all at Time Warner. We are really well positioned and operating at a really high level. If you would look at what the average first year to second year conversion, so you’ve got in the show on the air, the average rate of success in the industry on returning shows is about 16%. It’s been like over the last 10 or 15 year average for all suppliers, the last two years we’ve converted at 40%. So we now have the most returning shows that we had in the last 30 years in 18. This year we had almost a 60% success rate in converting pilots into first year show. So we have to be successful on those first year shows and we have to convert those into second year shows but we are definitely operating at an extremely high rate of success and the testament to Peter and Craig and the team, they have done an incredible job and kind of locked up some of the best talent in the industry, Chuck Lorre and John Wells, and Greg Berlanti and the list goes on and on.

Jessica Reif - Bank of America Merrill Lynch

So it doesn’t sound like not owning a broadcast network has been a disadvantage and we are seeing that in Double Negative. So is it an advantage or disadvantage not to be attached to a broadcast network?

Kevin Tsujihara

I think that you would always like to be able to have the assured shelf-space. But I think we’ve turned what could be a disadvantage of not owning a broadcast network into an advantage. You didn’t mention JJ, but I am using this example. We have the ability to be able to – but JJ knows that we are going to – we are going to put the right show at the right network, that we are going to bid them out as competitively as possible to maximize the value of that content. If two pilots are on two different networks, I mean if two first year shows, there is one on NBC and one on FOX, we are able to match them up and to maximize them and it allows us – and for the writer producers like Chuck and JJ and the guys, to know that we are absolutely going to maximize the value of the content and if we don’t from the scale and we are pre-sold at least one show at every network this year which we are very proud of, and we have at least three shows on every network. Nobody else has that. So just it really allows us to be able to go in with scale and the ability to kind of play these guys off on each other, that quite frankly nobody else can do.

Jessica Reif - Bank of America Merrill Lynch

Staying on the topic of TV, how would you characterize the current health of the buying community both domestically and abroad?

Kevin Tsujihara

I think domestically in a lot I was standing back there listening to the [Ander Peter] and in your conversation, a lot of it was about retrans and I think that we look at that whole kind of retrans kind of negotiation that was going on between CBS and Time Warner Cable, kind of in the middle and obviously it’s not part of our company anymore. But the value of the retrans is now a significant source of revenue for the broadcast networks. And it really has kind of changed the conversation that we are having about the viability and kind of the economics of the broadcast network. And so it really does, from a content perspective, it does give us some comfort that they are going to be able to continue to build to kind of have the programming budget for primetime and sports, that’s going to move this new revenue stream of retrans as well as advertising.

So on the domestic side from a broadcast perspective, I think that the trends for them are much different than what it would have been five years ago if we were having this conversation. As it relates to the international marketplace, the fact that, the quality of the programming by virtue of the budgets and the license fees that we have is really holding up. As the networks continue to the international buyers continue to look to American programming as a key kind of source of programming for them and we haven’t seen that let up at all.

Jessica Reif - Bank of America Merrill Lynch

Have prices changed much (inaudible)?

Kevin Tsujihara

I don’t think, if they are and they continue to kind of go in the right direction, kind of positive because for the same thing – the same conservation interestingly on the theatrical side, there is a reason why Hollywood product has able to travel and part of it is kind of the production levels and the power that we’ve created is pretty high.

Jessica Reif - Bank of America Merrill Lynch

I have never heard a seller says that price is fair? That means healthy, which is a good thing. Okay. Are you focussing resources in producers, scripts originals for Cable and [Xbox]?

Kevin Tsujihara

Yes, absolutely I think it’s a really opportunity. I think for us we’ve done a good job with our partner Turner in creating a lot of programming for them. Some of their best shows, The Closer, (inaudible), [Dow Clan], Dallas, I think there is opportunities with other networks and I am really, really excited and happy about the fact that we sold our first two pilots to HBO. We have Leftovers and we have the Westworld and Jessica, you know that how Time Warner has run in the past and that wasn’t for synergies, that was something that Jeff didn’t said that Kevin, you have to work better with Richard and Michael. That was really about the culture of the company changing and kind of the dynamics between our two divisions is changing and I am really excited about that opportunity because selling the premium cable and the cable is important.

I think the other piece of where there is an opportunity for Warner Bros. is on the non-scripted side. So if you look at what we just recently announced, we announced that we brought in Mike Arnold who is incredible. This guy – this is the buy that brought you American Idol, Health Kitchen, So You Think You Can Dance, he is a dynamo and I think there is a real opportunity to kind of create in that whole non-scripted area which if you do well you could export out. But there is international opportunities on these formats as well. So big opportunity in cable programming both for basic cable as well as the premium network, like HBO show time. Opportunities on the non-scripted side, and finally as you said, there is going to be an opportunity to – on the non-original side, I think that Netflix and Amazon are going to be buyers and you have to figure out what the back end values of that programming is going to be, but it’s definitely some level where we have our eye on right now.

Jessica Reif - Bank of America Merrill Lynch

So more buyers is always a good thing. Moving on to theatrical, as you said you have been consistently number one and number two, it’s like over 22 years, it’s a big number. So I guess how did you institutionalize success and what really had driven the business, I mean you really have been the most consistent of any studio probably ever?

Kevin Tsujihara

Yes, I think that the strategy is really about having distinctive voices out in the marketplace. So if you start with – if you take your slide and say, okay, well two or three pictures we are going to have come for Alcon and we will distribute them. And then they have – we are actually, we have a movie coming out with them in a couple of weeks Prisoners, starring Hugh Jackman. You then lay on top of that four to six pictures from their line, and the four to six pictures are going to be very focused on core, contouring is a great example of what they do great. Adult comedy as We're The Millers, and Horrible Bosses are great examples of the kind of pictures that I think that are really good that they do well.

Female centric kind of pictures, that they have been really successful and obviously the Tolkien kind of franchise with the hobbit is kind of a signature piece of new one. Then you have 12 to 14 pictures coming from Warner Bros. And I think the basis, foundation of those 12 to 14 pictures are going to be coming from DC Entertainment. We have Batman versus Superman coming out in ’15, but those are going to be in the coming months a lot of announcements regarding kind of the future movie, television, games and consumer product pieces that are going to be coming from DC. On top of that, today’s announcement that we made about J Rowling is incredibly important because it’s another piece of kind of a foundation of what we want to be able to build off of.

Jessica Reif - Bank of America Merrill Lynch

What was the – the announcement that you are making one movie or series of movies?

Kevin Tsujihara

I think one at a time, the whole bid is that we are going the film franchise and build off of kind of the success. We announced today that we are going that J is writing a screenplay for the first time based on fantastic piece and where to find them, it was – it’s a book that was written about a character in the world who was commander and professor at Hogwarts and history. She is taking that and expanding upon that to create a screenplay which we hope is going to extend both the franchise, a couple of new franchise quite frankly. And so the impact is not only on our theatrical side but all kind of parts of our business.

Jessica Reif - Bank of America Merrill Lynch

Can you like reuse the Hogwarts for that or –

Kevin Tsujihara

Obviously it’s a little early kind of in the process to figure out what exactly we could do but I think that the look and feel of the movie is going to be very something that you want to stay in that world. So it’s exciting. And then the rest of the slate is going to be sold out with pictures that I think Warner Bros. does really well, I think that some of the pictures that we released this year are kind of indicative of how we fill out the rest of that space but the foundations are there, that they create kind of a distinct display that going forward we feel very comfortable about and I think that we go off of business that economic underpinning are really sound.

Jessica Reif - Bank of America Merrill Lynch

[DC] still represents an important reboot of the key DC Comics franchise, can you talk broadly about the DC strategy and how does this play into the licensing business?

Kevin Tsujihara

We couldn’t be happier about the movie that Jake and with Chris Nolan’s help can be created. It was a total reboot of the Man of Steel or Superman and it really gives credibility to that character and Henry did a great job. It’s a perfect springboard to then move into next 15, we think Jake is going to be directing Batman and Superman. Batman, in the movie we haven’t titled it yet and we are really excited about the fact that we were able to convince Ben to play Batman. It is a perfect for the role and it’s going to be a Batman that you’ve absolutely never seen before, he’s kind of tired and kind of weary, he’s been doing this for a while and Ben is the exact perfect for the vision that Jake has for that character and the fact that you saw such a passionate response and that is really kind of a testament to the love that people have for this character and it’s really exciting to see kind of where this is going and exact vision of how he’s going to put that movie together. We think it’s going to be huge.

Jessica Reif - Bank of America Merrill Lynch

So just the DC strategy overall though is that – tying to licensing, I mean more than those –

Kevin Tsujihara

I think that if you think about DC, it really does kind of tie to all part of our business, that’s the kind of thing. We focus on the movies and the movies are an important part of it but we have a whole strategy that we are going to lay out on the move side of the movies that are coming from DC but that you kind of forget the fact that we have re-animated shows that we have right now. Arrow was the number one show on the CW on primetime television. You think about the home entertainment side, the directed videos that we do with DC and the game, this year we have two huge games, Injustice was a fighting DC comic game and we have a Batman game coming up. And then on top of that is all the consumer product pieces, the TELUS is an important partner about one of many and so DC really does touch a lot of parts of our business and is an important part of the strategy in how we are going to grow going forward.

Jessica Reif - Bank of America Merrill Lynch

One more theatrical, you were recently part of Legendary pictures as a financing partner, how should we think about the financial impact on your business going forward and how many more films that you are going to do with them?

Kevin Tsujihara

We have three films that we are going to be in business with Legendary. We’ve got the [Lennox May], we have the sequel to 300 and we have Interstellar which is Chris Nolan’s next movie. We have a very productive relationship with Legendary and worked well for both of us. I think there was kind of a divergence on our financial objectives and so we both decided to kind of part ways but it was really amicable and I think it was the right thing for both of us. As far as how it’s going to impact us, there is no operational change in the way it’s going to impact us in any way. We don’t think about we put a slate together the way I just described, we don’t think about whether we are going to have co-financings or not have co-financing as it relates to that. And as a result, there really isn’t that much of a change from an operational standpoint and as Jeff has mentioned, we have the ability to access the capital that we need to be able to put that slate together. So I don’t think you are going to see any impact from a Warner Bros. perspective.

Jessica Reif - Bank of America Merrill Lynch

And moving on to home entertainment, you have been playing as a leader in this area, so just to get your views on the number of your more recent initiatives, but first, what is your outlook for home programming, home entertainment trends both physical and ESP?

Kevin Tsujihara

I think as it relates to – we kind of look at it now as the sell-through. And so if you look at what happened in sell-through you had five or six years of fairly significant declines in the last couple of years. This year will be continuing kind of basically flat now of what’s happened in the toll has been from a consumer perspective on sell-through. But the real good thing – the good news here is the declines of standard definition are being more than offset by the increases in Blu-ray and digital ESP. So you are now seeing as I said in the US you will see over 50% year on year growth on ESP. Internationally you will see 25% -- around 25% growth on year on year with ESP, and what’s important about that is margin, where you brought it up earlier, obviously the margin improvement on both of those things is a positive. So even on flattening we can have improved economics, obviously the goal and the hope is that we can improve the user experience of digital, we can create incentives for people to go digital, a lot of us, on most movies now, ESP is available two weeks before physical, it’s an inducement to get you into digital. And so the more we can do to improve kind of the digital offering and to accelerate that growth we have the opportunity to be able to bring growth back into sell-through and improved margin.

And so that’s kind of a double whammy, it’s a good thing. And the other place that I think it’s really – now you asked about kind of sizing it, if you look at the total transactions of home entertainment, so on the transactional side, ESP and rentals, both sell-through in rental, it’s about 25% digital now, if you look at be going that far in total into that as well, on the digital you are up to about 35%. So it’s a meaningful, that’s a domestic number, so it’s a very meaningful number and of what’s to become and you are getting traction on some of these digital businesses and the reason why international growth has is lower than domestic growth is, you haven’t seeing the push by Amazon and Apple that you had here, and you can expect those growth rates to accelerate as Apple and Amazon are pushing out internationally as aggressively as they are.

Jessica Reif - Bank of America Merrill Lynch

And can you give us an update on how Ultraviolet is progressing?

Kevin Tsujihara

Ultraviolet is definitely on the right path. We now have about 15 million users. All the studios that are in except for Disney, we have over 10,000 titles, we are live in six countries and we are going to add two more by the end of the year. Retailer support is increasing, so it really is about users driving retailers to come in which drive users and so Target will be coming in, I think they announced that they are going to launch a store the beginning of October. I would expect to see more and more announcements kind of between now and the end of the year as more retailers come on board but we are definitely gaining the traction that user experience is much better. And we are continuing to make it better. I think that we are far from done on where we need to get to go but we are definitely going and pointing in the direction.

Jessica Reif - Bank of America Merrill Lynch

How do you see the subscription to the on-demand landscape evolving in the US and aboard? Do you have more or less competition over time?

Kevin Tsujihara

Hopefully that kind of the capital infusion that we believe is going to kind of drive them having a bigger programming, to become a third competitor in the US. We’ve had a number of conversations with a number of other people about plans to come in, not just they are going to – what scale that those guys are going to be coming in to be to compete against Netflix, Amazon and Hulu but you definitely see a lot of competition internationally. But certainly as we are talking about Hollywood VIP it’s a kind of – you are seeing local kind of spot plays kind of emerging as well as the big US guys going aboard. And where that is becoming kind of – is group from a content perspective is, they are not actually competing with broadcasting – the broadcast guys, for example in the UK that you now see not film Amazon play and Netflix is competing with Sky for [pay 1 and pay 2] rights. So you’re really seeing a lot more compensation for content and that’s just kind of one example of we are tapping a number of markets where you see not only – those the big guys coming in but also local players.

Jessica Reif - Bank of America Merrill Lynch

So you are tapping this pricing, again whether they bought in the US and outside the US?

Kevin Tsujihara

I think that bigger opportunity – I think in the US you are beginning to see a slight shift in programming budget. There is a shift into some regionals, internationally I am not seeing any interesting, all kind of pure library or syndication content. And so you are seeing more aggressive buying for library product outside of US than you are domestically.

Jessica Reif - Bank of America Merrill Lynch

This one more and we will open it up, just on games or gaming you mentioned the opportunity of DC Comics, but you have talked in the past about having – gaming having the potential to drive 10% plus of Warner Bros. profit. Can you give us an update on kind of you are able to achieve that milestone and maybe what franchises do you think will be the most important?

Kevin Tsujihara

We feel really good about what we have done. We are by far the biggest – probably the only studio that’s making money on the game side like this. It’s a business that we’ve built from scratch with some acquisition but we have really three key franchises to date. It’s the local franchise, it’s the Mortal Kombat franchise, and it’s the Arkham of Batman franchise, those three are very significant. We are having a very good year. We have two more big games coming out, LEGO Marvel coming out as well as the next installation of the Batman Arkham series coming out in October as well.

That business like our other business is going through a digital transition. You are going to see two platform launches coming up before the end of the year in Xbox One as well as PS4, both of those have big digital plays in them but as that business transitions to mobile and these are the digital offers obviously we are taking our franchises and moving there as well. And but we are on track to having a great year in games and we feel very good about where that’s going. And as you said it’s being driven – the new franchises that we are going to be zoning are going to be DC franchises. We think there is big opportunities to build off of what we are doing throughout the rest of the company in games as well. So if you look at – if you wrap it up, because as you said you are going to open it up, to wrap it up as you look at where growth is going to occur within the company, it’s really around, we love the television business and the secular dynamics as I said earlier. We are really well positioned for growth and there is areas within television that we can’t grow both on the non-scripted side, on the cable side, internationally. The feature side, as we said that the secular trends are all the fears around, will the digital transition occur in home entertainment, will that business – is there growth there, you are looking at emerging markets like China and Brazil and Russia, I love where our slate is positioned going forward. We think we have the pillars of the foundation really in the right place.

And as I said, we are number one in – we are really well positioned for that transition on the home entertainment side and with the DC pushing, if you are in consumer products and games we think there is opportunities there as well. So we are able to get some margin expansion also through the digital initiatives and continuing to look for ways to be more efficient and we are very confident that we can grow this business going forward.

Jessica Reif - Bank of America Merrill Lynch

Okay. So with that let’s open it up for questions.

Earnings Call Part 2:

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